In an era of high interest rates, Israel’s banks are recording incredible profits. Many investors would like a piece of the credit provision pie, rather than purchasing shares or bonds in the public market. To this end, large investment funds like Apollo Global Management and others have built private investment mechanisms that compete with the other alternatives.
Jonathon Orr, Managing Director responsible for client portfolio management across international wealth at Apollo, among the world’s largest and leading investment firms, explained at the Globes Alternative Investments Conference, held in partnership with the Phoenix Group and Apollo, that the growth of this market is good for all markets, as it creates alternatives. He also stated that he was "not bothered" by the start of interest rate cuts on the part of the US Federal Reserve, and believes that the provision of private debt by funds such as Apollo will remain attractive, as compared with the alternatives.
"The private investment market is currently valued at $1.5 trillion," says Orr, but adds, "It’s hard to know the exact number because there’s no data available. In practice, this market includes debt for infrastructure, debt for financing entrepreneurship, and a variety of other things. When people talk about the private credit market, they’re talking about direct lending whose volume is estimated at $750 billion. I think the correct thing is to compare it to other types of credit markets. For example, the leveraged public debt market (public high yield), which has a $1.5 trillion volume, syndicated loans provision (by several lenders) which has a similar volume. They grew at a slower pace in recent years, and the private credit market grew more."
"More investors get access to excess returns"
"The private credit market has grown, and to some extent it has taken a share of the leveraged (public) debt market. I don't see this as a negative thing. In my opinion, it means that more investors get access to excess returns. It's also an alternative channel for borrowers, which is a good thing for markets more broadly. This gives borrowers more than one option," adds Orr.
Orr explains that the approach offered by the private debt market, in which Apollo-style investment funds and other entities, provide credit to finance infrastructure projects and other types of projects, is important. This is because, he maintains, "These options are drying up." He refers to the situation in 2022, a year in which global inflation suddenly reared its head, and the US central bank, followed by central banks around the world, raised interest rates sharply. Orr points out that the private debt market creates more alternatives for companies and economic entities.
What caused the growth of the private debt market?
Orr: "One factor is the approach: education or awareness. For many years, the private credit market was for institutions only. It provided credit, locked for periods of 6-7 years, for investment funds that had very high minimum thresholds (for granting the loan). This market has grown rapidly. Today we see a broader approach, as well as investors who are more aware of their ability to get a higher return. We also see new, semi-liquid tools that are relevant to more investors, for example, family firms and even smaller institutional entities."
Orr describes a new picture, created in recent years, in which the credit that is granted is considered private, meaning, not raised on the stock exchange or through banks, but through private investment entities, so that it is more accessible and liquid than before. Orr says that the liquidity can also reach quarterly levels, meaning that upon giving an order, the lenders' money can be received back within a few months. These are still loans that are considered illiquid, but according to Orr, this is how the investors in the private entities are actually protected. But he says, "Today, the minimum amounts (for placing a loan in the private credit market) are lower, and the accessibility of investors to this market has increased," which explains the growth in the private debt market. He adds that "education" has also become an important factor. Investment managers today feel obliged to explain to investors the alternatives in the private debt market. "Separate myth from reality," he says.
"We still have a very high interest rate in the debt market"
US Federal Reserve Chair Jerome Powell reduced the interest rate on the dollar by 0.5% in September to 5%. How does this measure affect the private debt market?
Orr notes with a smile that we can talk about this topic all day, as the interest rate cut can have many consequences for a market that is ultimately engaged in having debt. "The simple answer to this question is that total returns, in the absolute sense, are still very attractive in the private debt market. If the Federal Reserve cuts the interest rate another 0.5% by the end of the year, we will end 2024 with interest rates north of 4%. This has not happened, aside from the last two years, since 2007. This means that after the interest rate cut, we are still at a very high interest rate in the debt market. The private credit market spread, about 5%-6%, means that the private debt market provides a return of over 10% to investors. It's very attractive."
According to Orr, even after the Federal Reserve’s interest rate cut, the private debt market remains more attractive compared with other alternatives that investors face, such as providing credit as part of a syndicate (a yield of 2% above the Fed interest rate) or the high yield marketable debt securities market (3 % above the Fed interest rate). He adds that "Returns on the money market funds are dropping rapidly. I think that the possibilities in the private market continue to be very attractive. Another way to think about interest rate reductions is on the risk side. Lower interest rates mean lower financing costs. This is good for investments within the fund (reducing the risk that the companies will go bankrupt). I think this doesn’t change the attractiveness of the private debt market in general."
Default rates are rising. How does that affect you?
Orr points out that since the end of last year, his industry has noted an increase in secured debts, because of the increase in interest rates. The rate of loans on which interest is not paid (non-accrual) has increased. "It's not surprising. We often talk about the importance of vintage. I divide the market into two parts, the one before 2022 and the market since then. What did the market look like before 2022? Zero interest rates and an increase in inflation that we thought would disappear quickly. In 2022, there were leveraged business models. Loans were given to businesses that could justify themselves in a zero-interest environment, but not when the interest rate was much higher."
Interest rates did climb that year, leading to an increase in leverage and pressure on many companies already leveraged at that time. "Since 2022, the environment has changed a lot. Loans were given with a horizon for where the interest rate would be going (upwards). Loans were given in a much more conservative manner."
What’s the best way for an investor choose the right fund in your area?
Orr points out that supply at a number of funds has greatly increased, along with demand from investors. "You need to find investment managers who have done this for many years. We have half a trillion dollars. When it comes to providing private credit, we are the largest private entity in the world in this field. I would check historical performance. In addition, I would check the default (insolvency) rates. Our history goes back to 2008. You need to check the kind of market you want to be in. We specialize in large cap loans, most of the players are in the business of providing private credit to small to medium-sized companies, companies with earnings before interest, taxes, depreciation, and amortization (EBITDA) of $30-60 million a year. We focus on large entities with an EBITDA of over $100 million."
Full disclosure: The conference was held in partnership with Phoenix and Apollo Global.
Published by Globes, Israel business news - en.globes.co.il - on October 10, 2024.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2024.